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Notes On Debenture Bonds

Debenture bonds are unsecured bonds supported by the creditworthiness of the issuer, featuring higher risks and interest rates compared to secured bonds. They can be convertible or non-convertible and include various types such as subordinated and senior debentures. These bonds are important for raising long-term capital and providing fixed income to investors while also diversifying investment portfolios.

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61 views2 pages

Notes On Debenture Bonds

Debenture bonds are unsecured bonds supported by the creditworthiness of the issuer, featuring higher risks and interest rates compared to secured bonds. They can be convertible or non-convertible and include various types such as subordinated and senior debentures. These bonds are important for raising long-term capital and providing fixed income to investors while also diversifying investment portfolios.

Uploaded by

s2301844
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Notes on Debenture Bonds

1. Definition of Debenture Bonds

A debenture bond is a type of unsecured bond that is not backed by specific assets or collateral.
Instead, it is supported solely by the creditworthiness and reputation of the issuing company or
government.

2. Key Features of Debenture Bonds

 Unsecured: No physical assets pledged as collateral.

 Higher Risk: Investors rely on the issuer’s ability to repay.

 Higher Interest Rates: Since they are riskier than secured bonds.

 Issued by Corporations & Governments: Often used to raise long-term capital.

 Can Be Convertible: Some debentures allow conversion into company shares.

3. Types of Debenture Bonds

1. Convertible Debentures – Can be converted into shares of the issuing company.

2. Non-Convertible Debentures (NCDs) – Cannot be converted into shares; they remain as fixed-
income securities.

3. Subordinated Debentures – Lower priority in case of bankruptcy; paid after senior debts.

4. Senior Debentures – Higher priority over subordinated debts in bankruptcy.

5. Zero-Coupon Debentures – Do not pay periodic interest; sold at a discount and repaid at face
value.

4. Accounting for Debenture Bonds

(a) Issuance of Debenture Bonds

 Issued at Par:

Dr. Cash xxx

Cr. Debenture Bonds Payable xxx

 Issued at a Discount (below face value):

Dr. Cash xxx

Dr. Discount on Bonds Payable xxx


Cr. Debenture Bonds Payable xxx

 Issued at a Premium (above face value):

Dr. Cash xxx

Cr. Debenture Bonds Payable xxx

Cr. Premium on Bonds Payable xxx

(b) Interest Payment

 For periodic interest payments:

Dr. Interest Expense xxx

Cr. Cash xxx

 If interest is accrued but not yet paid:

Dr. Interest Expense xxx

Cr. Interest Payable xxx

(c) Redemption or Maturity

 When the company repays the debenture at maturity:

Dr. Debenture Bonds Payable xxx

Cr. Cash xxx

5. Advantages & Disadvantages of Debenture Bonds

Advantages Disadvantages

No asset collateral required Higher interest rates due to risk

Flexible financing option Credit rating impacts interest costs

Can be converted into equity (if convertible) Increases financial leverage and debt burden

6. Importance of Debenture Bonds

 Used by companies to raise long-term capital without pledging assets.

 Provide fixed income to investors.

 Help diversify investment portfolios.

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